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Monetary Policy and Inflation in Israel

Author

Listed:
  • Gil Buifnan

    (Bank of Israel)

  • Leonardo Leiderman

    (Bank of Israel)

Abstract

Monetary policy is the subject of sharp debate in Israel. Establishing a set of basic empirical regularities on these issues is a clear prerequisite for resolving these controversies. The purpose of this paper is to provide a body of empirical evidence on the role of monetary policy measures in the inflation process. Based on a sample of quarterly data from 1989 to 1997 we find that there is a close association between movements in the rate of inflation and shifts in monetary policy variables. The empirical results show that the impact of monetary policy variables-­such as the rate of change of Ml beyond the rate of growth of GDP and the ex-­ante real interest rate on Bank of Israel funds-­on the rate of inflation works with lags that peak at about two quarters after the change in the monetary variable. Moreover, a relatively simple inflation equation does a relatively satisfactory job at predicting­-in a one­-step­-aliead sense­-most recent quarterly movements in the rate of inflation. The empirical methodology was applied in order to account for the reduction in the rate of inflation from about 16-­18 percent in the period before 1991-­92 to about 10 percent per year thereafter. The paper quantifies various developments in key variables, such as fiscal, monetary, labor market, and external that combined to produce a decline in the rate of inflation.

Suggested Citation

  • Gil Buifnan & Leonardo Leiderman, 1998. "Monetary Policy and Inflation in Israel," Bank of Israel Working Papers 1998.04, Bank of Israel.
    • Handle: RePEc:boi:wpaper:1998.04
    as

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    File Function: First version, 1998
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    References listed on IDEAS

    as
    1. Bruno, Michael, 1993. "Crisis, Stabilization, and Economic Reform: Therapy by Consensus," OUP Catalogue, Oxford University Press, number 9780198286639.
    2. William Poole, 1994. "Monetary aggregates targeting in a low-inflation economy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 87-135.
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    Cited by:

    1. Tanya Suhoy & Yotam Sofer, 2019. "Getting to Work in Israel: Locality and Individual Effects," Bank of Israel Working Papers 2019.02, Bank of Israel.
    2. Leonardo Leiderman & Hadas Bar-Or, 2002. "Monetary Policy Rules and Transmission Mechanisms under Inflation Targeting in Israel," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 14, pages 393-426, Central Bank of Chile.
    3. Nyoni, Thabani, 2019. "Understanding inflation trends in Israel: A univariate approach," MPRA Paper 92427, University Library of Munich, Germany.
    4. Federico Sturzenegger, 2019. "Macri´s Macro: The meandering road to stability and growth," Working Papers 135, Universidad de San Andres, Departamento de Economia, revised Oct 2019.

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